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M1 Ltd’s Share Price Is Down By Over 60% From Its Peak: Is The Company A Bargain Right Now?

From an all-time high of around S$4 in March 2015, M1 Ltd’s (SGX: B2F) share price has fallen by over 60% to S$1.55 right now. Looking at this, some investors may be wondering if Singapore’s smallest operational telco is a bargain at the moment.

There is no easy way to find out if the M1 share price is good value, but there may be clues in One Up On Wall Street, a classic investment book from legendary fund manager Peter Lynch.

From 1977 to 1990, Lynch ran the US-based Fidelity Magellan fund and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch shared a general investing checklist he had used when he was searching for bargains. Let’s run M1’s value through Lynch’s checklist and see what turns up.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Right now, M1 has a PE ratio of 10.8. The chart below shows the telco’s PE ratio over the past five years, and you can see that the company’s current valuation multiple is clearly near a five-year low. This suggests that M1’s PE ratio is low.

Source: S&P Global Market Intelligence

Meanwhile, M1’s larger local peers, Singapore Telecommunications Limited (SGX: Z74) and StarHub Ltd (SGX: CC3) have trailing PE ratios of around 15 (after adjusting for non-recurring items including the one-off gain from the spin-off of NetLink NBN Trust (SGX: CJLU)) and 13.6, respectively. These numbers also suggest that M1’s PE ratio is low.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

In M1’s case, it counted Khazanah Nasional Berhad and Temasek Holdings among its largest shareholders as of 22 February 2018. Khazanah, which is the sovereign wealth fund of Malaysia, controlled a 28.69% stake. Meanwhile, Temasek, one of the Singapore government’s investment arms, and one of the largest sovereign wealth funds in the world, had a 19.98% stake. These numbers point to M1 having a high level of institutional ownership.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

There have been no instances of either insider buying or the company repurchasing shares over the past six months.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

The table below shows M1’s earnings from 2007 to 2017:

Source: S&P Global Market Intelligence

The telco has managed to generate a profit in each year for the period we’re studying. But, it’s also striking – in a negative way – that there has been no sustained growth in earnings for M1. In fact, the company’s earnings per share in 2017 was over 20% lower than in 2007.

5. Does the company have a strong balance sheet?

Based on its latest financials – as of 30 June 2018 – M1 had S$55.1 million in cash and equivalents, and S$450.0 million in total debt, leading to a net debt position of S$394.9 million. With significantly more debt than cash, it’s hard to label M1’s balance sheet as strong. But, for a telco that has generated S$142.3 million in free cash flow over the last 12 months, a net debt position of S$394.9 million does not seem to be excessive.

A Final take

On the positive side, M1 has:

a. A PE ratio that’s (a) near a five-year low and (b) lower than its peers;
b. a good record in generating profits; and
c. a reasonably strong balance sheet.

On the negative side, the telco has:

a. A high level of institutional ownership;
b. a lack of buybacks and insider buying; and
c. a lack of consistent profit growth.

Looking at the results, Lynch may have some interest in studying M1 further. But in any case, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point for further research.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.